Chocolate Fortunes

Lessons learned by leading chocolate companies can help firms succeed in the China market.by Lawrence L. AllenChina’s transformation from an isolated economy to a global economic powerhouse has turned hundreds of millions of its 1.3 billion people into eager consumers of everything from candy to cars. Thirty years ago, most Chinese had never eaten a piece of chocolate; their taste for chocolate was ready to be shaped by whichever company entered the country with a winning combination of quality, marketing savvy, and manufacturing and distribution acumen. For chocolate companies, China was the next great frontier—a market of almost limitless potential to be unlocked through a battle between the world’s leading chocolate companies for the hearts, minds, taste buds, and ultimately the wallets of China’s consumers.

Even today, the amount of chocolate sold in China is relatively small, accounting for less than 2 percent of total global consumption. Most Chinese would not be able to find chocolate in their vicinity even if they were willing to buy it.

When assessing the China market, the key for the “Big Five” chocolate companies—Cadbury (now owned by Kraft Foods Inc.), Ferrero SpA, the Hershey Co., Mars Inc., and Nestlé SA—has been identifying “accessible” consumers (see Big Five Chocolate Companies in China). Such consumers are those to whom the product could be sold with relative ease through China’s challenging distribution infrastructure and those with adequate disposable income who are receptive to foreign foods. How the Big Five executives applied the experience, management skills, and leadership capabilities they brought to China determined their companies’ approach in the country and whether they succeeded.

Lessons learned from selling chocolate in China

The battle for China’s chocolate consumers holds lessons for anyone doing business in the dynamic China market. There is no single path to business success in China, however; the country is too big, too complex, and evolving too quickly for simple, one-size-fits-all business formulas. Nevertheless, the story of the “chocolate war” is highly instructional for food, beverage, and other companies that plan to enter China.

Cultural considerations

Western and Chinese cultures evolved separately, and the cultural divide between the two reaches down to fundamental values, including beliefs about food. Western cultures have evolved on the principle that “man does not live by bread alone,” whereas many Chinese believe that min yi shi wei tian, “for people, food is heaven.” This world view is still alive and relevant for most of China’s population. Big Five chocolate company executives needed to grasp the significance of these fundamental cultural differences to formulate successful plans for introducing their products to Chinese consumers.

When chocolate was first introduced to the fledgling China market in the 1980s, most Chinese viewed it as a foreign and exotic curiosity. Imported chocolate was considered a luxury and the expense was more easily justified for a gift than for self-consumption. Gift giving, therefore, became the gateway for chocolate’s initial entry into China, and chocolate gifts from abroad influenced how the Chinese initially viewed the product.

Even Chinese beliefs such as yin and yang—the division of the natural world into two opposing but complementary forces—affected how and when the Big Five would bring a product to market. Chinese pharmacognosy is an ancient form of pharmacology that calls for balancing yin and yang forces within the body. Yin is described as the body being in a “cool” condition, and yang in a “hot” condition, both of which can be regulated by the kinds of foods consumed. To keep the body in balance, many people avoid consuming “heating” foods such as chocolate during summer months. Consequently, chocolate company executives in the late 1990s planned their business operations around significantly lower sales volume in the summer.

Logistical hurdles

Because chocolate requires storage and transportation temperatures from above freezing to 61 degrees Fahrenheit (16 degrees Celsius), China’s lack of chilled distribution channels dramatically affected how the Big Five formulated their China strategies. The chocolate companies’ problems began the moment their shipping containers arrived on the dock. Bureaucracy and frequent shortages of suitable delivery trucks in China during the 1980s and early 1990s meant containers would often sit for days or sometimes weeks at the port. Once chocolate was unloaded in China, a supply chain of make-do solutions put the product at constant risk of heat damage. For example, a band of workers on a warm day would unload a truck containing cases of chocolate, bucket brigade-style, up fire escape stairs into a second-floor apartment with a window air-conditioner and newspapers taped to the windows to block the sun. From such makeshift warehouses, distributors would pick up and deliver stock to retailers using small non-air-conditioned vans, cars, tricycle carts, and even bicycles. For the Big Five, China’s supply chain amounted to a gauntlet that their products had to run to enter retail stores. Though companies rarely worried about delivery conditions in developed markets, China’s supply chain became a major preoccupation for chocolate company executives.

Food stores in China throughout the 1980s were, for the most part, open-air wet markets filled with tanks of live fish and baskets of fruit, vegetables, and rice and other grains. Chocolate did not fit into the merchandising scheme of China’s wet markets. There was almost nothing the Big Five could do to influence the distribution and merchandising of their products in China’s retail environment. China’s retail sector would need to evolve before modern-day merchandising techniques could be applied.

Evolution of China’s retail sector

Remarkably, China’s retail sector obliged, though only in its largest cities. By the early 1990s, small privately owned neighborhood kiosks and “mom and pop” stores emerged throughout the country. Though large in number, these shops presented limited opportunities for chocolate, given chocolate’s relatively high price and the stores’ lack of air-conditioning. Modern-trade retail stores—air-conditioned hypermarkets, supermarkets, and convenience stores—emerged in the mid-1990s (see Understanding Chinese Consumers: Choosing the Right Retail Format). It was only then that the Big Five started applying impulse-purchase merchandising techniques in retail stores to make their products more visible and accessible. Though China’s retail environment developed rapidly, development did not occur evenly throughout the country (see the CBR, May-June 2010, Understanding China’s Retail Market). Managing a national business in a large country with various stages of development and income became one of the more complex aspects of selling chocolate in China.

To keep things manageable, companies segregated China’s cities into tiers defined by geography, actual or potential market size, level of consumers’ disposable income and exposure to foreign products, and most important, availability of modern-trade retail stores. Cities such as Beijing; Guangzhou, Guangdong; and Shanghai were classified as first-tier cities—those with the highest level of economic development and the highest living standards. By the late 1990s, these cities had enough accessible consumers and sufficiently developed retail and distribution infrastructure to support a substantial and robust (albeit highly seasonal) chocolate business.

Second-tier cities were more numerous, but provided fewer accessible consumers and far fewer suitable retail outlets. Most third-tier cities lacked air-conditioned supply chains and could support only a seasonal chocolate business. Since chocolate was physically, culturally, and financially inaccessible for the near-billion Chinese consumers who lived in lower-tier cities, they generally did not figure into company executives’ plans.

China’s distribution infrastructure and quality retail environments have been extending into China’s second- and third-tier cities, however, and have progressed significantly in recent years (see the CBR, November-December 2010, Reaching China’s Next 600 Cities). Each new air-conditioned hypermarket or supermarket that opens in these locations grants tens of thousands of people access to chocolate for the first time.

The Big Five chocolate companies must therefore push their products ever farther and deeper into China’s emerging retail stores in second- and third-tier cities, using the same store-driven approach they used successfully in the first-tier cities. Given the geographic reach of these hundreds of new markets, the challenge will be significantly more complex, however.

This trend, which will unfold over the coming decades, defines China as a multitier market: one country with people at distinctly different stages of development.

Managing China’s multitier market

To survive and prosper in China’s multitier markets, chocolate companies will need to sustain their businesses in first-tier cities, while investing human and financial resources in emerging second- and third-tier cities. Striking the right balance between the competing priorities of current and future opportunities is the crux of any successful multitier market strategy.

Take advantage of established networks

The Big Five companies’ past experience in first-tier cities may serve as a guide for doing business in lower-tier cities, and some capabilities developed during the last two decades may prove useful. For example, chocolate companies will no longer need to develop and build their entire local management talent from scratch; there is now a pool of experienced managers to deploy throughout the country.

Mass media makes a big impact

The openness of mass communication is changing lower-tier markets. Nationally broadcast television shows give Chinese in remote locations a look at the modern lifestyle in cities such as Beijing and Shanghai, sparking their interest in all manner of goods, including chocolate. Though mass communication may accelerate the development of future chocolate consumers in lower-tier cities, the battle for these first-time consumers will, in some fundamental respects, be the same as it was in first-tier cities. Most significant, it will still involve introducing an exotic and foreign curiosity to people who are unaccustomed to foreign tastes and textures.

Embrace the company’s foreign heritage

To succeed in China’s multitier market, chocolate companies will need to understand and use their competitive advantages—which may include their foreign heritage, product quality, and management depth—and be realistic about their inherent limitations compared to local competitors. Foreign chocolate companies’ biggest strength is the credibility that foreign brands have with China’s consumers—something local competitors cannot copy. Companies must keep in mind that credibility can be lost, however. For example, Chinese consumers viewed Nestlé differently after it stopped producing high-end chocolate and began marketing a series of lower-priced chocolates, all of which experienced low sales. Product quality has been another competitive advantage for multinational chocolate companies. Local companies, which lack extensive chocolate expertise, must either copy or attempt to out-innovate foreign companies that have been marketing chocolate for more than a century.

Offer different products for different consumers

China’s multitier economy demands complex product stratification: various products at a range of prices that meet the needs of different consumers. Companies such as Mars, which offers a wide range of products, are best positioned to compete across China’s multitier markets. Mars can meet the needs of China’s multitier market through selectively distributing its products according to consumers’ stage of chocolate development—their taste for and ability to buy the product. For example, Mars can sell smaller Dove chocolate bars as an introductory offering for emerging consumers in second-tier cities and high-priced Dove boxed chocolates in cities, such as Shanghai, with more sophisticated consumers.

Effectively executing this strategy for a country the size of China requires extensive coordination. Companies must build their business plans—in many cases, city-by-city—based on a complex decision matrix. The matrix should incorporate factors such as geographic location, level of infrastructure development (including the number of air-conditioned stores), strength of the local distributors, level of general economic development, and consumers’ taste for and interest in purchasing chocolate. This will be a dynamic process, since companies will need to continuously reassess their priorities as millions of consumers simultaneously migrate through China’s multitier market each year.

Capitalize on global retail best practices

Foreign chocolate companies generally have more management experience, particularly in marketing and effective retailing. Therefore, they can better capitalize on the rapid growth of modern retail stores in China by leveraging their extensive global retail experience and introducing global best practices that are new in China. Some foreign chain stores may be more likely to partner with an international company—one that is familiar with their global systems and techniques—to organize and plan the chain’s chocolate retail shelf in their China stores.

Consider limitations

Foreign chocolate companies should understand their limitations in China. It is unrealistic for multinational corporations with higher operating costs to compete with local companies on price. In addition, many foreign companies in China are at a disadvantage when locally procuring commodities such as milk and sugar, since local companies often receive more favorable pricing. With higher built-in operating costs, multinational corporations that attempt to compete with local companies on price may jeopardize their sustainability through loss of long-term profitability. To compete in China, foreign chocolate companies must focus on the higher end of the market, embrace their foreign heritage, and guard their competitive advantage.

Succeeding in the chocolate market

China’s emerging chocolate market offers a level playing field for all foreign chocolate companies. Chinese consumers view chocolate as an exotic foreign product, so each foreign company enjoys the same level of credibility. Retail prices are relatively high and manufacturing costs low, so no firm is disadvantaged for price or cost reasons. All companies have had to deal with insufficient consumer and market information and have faced the same challenges when dealing with China’s rapidly evolving economy and regulatory ambiguity. Therefore, the decisive battle in China’s chocolate war is not a universal struggle with China’s economic and infrastructure issues, but rather a challenge within chocolate companies to discern their own route to commercial success in China. The greatest challenges for these companies do not lie externally in China’s enigmatic marketplace, but internally within each organization.

Though China’s future chocolate market will present new and daunting difficulties, with tens of millions of new consumers emerging each year, chocolate companies will have more opportunity than ever to build sustainable and profitable China businesses. Winning the future battles in China’s chocolate market will demand precisely what was required in the past: the will to sustain a long-term commitment in China and an unrelenting focus on meeting the expectations of China’s emerging consumers.

[author] Lawrence Allen (www.chocolatefortunes.net) is a 20-year China-business veteran, leadership advisor, and author of the book Chocolate Fortunes: The Battle for the Hearts, Minds, and Wallets of China’s Consumers. He is based in Beijing.